The newest Senate plan to dismantle Fannie Mae and Freddie Mac promises to address many details about the future of the mortgage finance giants, except one: Will the investor groups that scooped up shares ever be able to pocket any of the stellar profits that the companies have churned out recently? (Kevin Lamarque/Reuters)

“The answer is going to come in court rather than in Congress,” Sen. Mike Crapo (R-Idaho) told Bloomberg Television on Thursday.

Crapo joined with Sen. Tim Johnson (D-S.D.) this week to unveil the broad outlines of a proposal that would wind down Fannie and Freddie, replace them with a new agency, and shift some of the risk of mortgage losses to the private sector. The lawmakers have declined to publicly discuss the details until they offer their legislation, which could possibly occur Friday.

But whether the companies are shut down or kept alive, the outcome of several investor lawsuits making their way through the courts will ultimately determine how much of the companies’ profit will go to investor groups.

“The litigation is important because it will determine who gets that money: the taxpayers or shareholders,” said Jaret Seiberg, an analyst with Guggenheim Securities.

At issue is the arrangement the government created when it took control of Fannie and Freddie at the height of the housing crisis in 2008.

Under that deal, the U.S. Treasury began injecting the companies with huge sums of cash to keep them solvent. In return, Fannie and Freddie issued “senior preferred” shares to the government that paid a 10 percent dividend. The government also acquired rights to own 79.9 percent of the companies’ common shares.

But Fannie and Freddie were losing money at the time, and they were borrowing money from the Treasury to pay the 10 percent dividend to the Treasury. In August 2012, the government directed the companies to send nearly all their profits to the Treasury in the form of dividends instead.

Fast forward to this year. Fannie and Freddie have done the unexpected: They’ve turned profits for many quarters in a row. At the end of this month, they will have sent about $203 billion in dividends to the Treasury — more than the $188 billion they received in the taxpayer-funded bailout.

But that doesn’t get them out from under the government’s thumb. As long as they’re in conservatorship, Fannie and Freddie must keep turning over their profits to the government. In essence, they can never “repay” the bailout money.

Several investor groups, such as the mutual fund firm Fairholme Capital Management and the hedge fund Perry Capital, are suing to end the Treasury’s take-all-profits approach. These investors bought shares on the cheap, betting that Fannie and Freddie would become cash cows. They say they’ve been duped.

“We were misled,” said Tim Pagliara, who owns shares with a market value of about $80 million. Pagliara is not involved in the lawsuits on behalf of his clients. But he said he would not have invested in the firms had he known that the Treasury would change the deal. “They pulled a switcheroo.”

If the investors prevail in court and it’s deemed that Fannie and Freddie have given all they need to give to the government, whatever is left over would be given to shareholders, Seiberg said.

The first in line would be the “junior preferred” shareholders, such as Fairholme. When they’re fully paid off, the money would flow to common shareholders, if there’s anything left. The Treasury could collect some of the money with other common shareholders, and it would get first dibs.

If investors don’t win, they’re left at the mercy of Congress, Seiberg said.

When Johnson, the Senate banking committee chairman, and Crapo unveiled their plan this week, Fannie’s and Freddie’s share prices plunged, though the preferred shares fell less than the common shares.

“There was a lot of speculation that the bill would reprivatize some or all of Fannie and Freddie, not just liquidate them,” said Karen Petrou, managing partner at Federal Financial Analytics. “But the message was there was going to be no bailout for these speculative shareholders.”

Shares have since bounced back in what’s become primarily a matter of political prognosticating as opposed to financial analysis. Many experts tracking the issue have said it’s highly doubtful that the Johnson-Crapo plan will reach the president’s desk this year or even get a vote in the full Senate.

But if it does, it could affect Fannie and Freddie investors, depending on how much time it allows for a wind down, said Guy Cecala, chief executive of Inside Mortgage Finance.

“If it takes five or 10 years, that allows Fannie and Freddie time to generate more profit and keeps them in conservatorship limbo,” Cecala said. “That’s more money to the Treasury unless the courts rule in favor of the investor groups.”

Fannie and Freddie have said they expect to remain profitable, though not as profitable as they have been in the past few quarters. The Office of Management and Budget this week estimated that the companies would send $180 billion to the Treasury during the next 10 years.

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